Public Accounts Committee on May 5th, 2016

[Michael Ferguson]

Mr. Chair, that certainly is the objective. I think what we are raising in the course of this audit is that it's hard to be able to know whether the program is going to achieve that objective. I think it's still a bit early to try to assess whether there is a self-sustaining ecosystem, because the money has only just been gathered and collected and the investments are now being made. Definitely one of the things the Department of Finance needs to make sure it is measuring and keeping an eye on is whether the venture capital system in Canada is going to be able to become self-sustaining.

Again, we raised some concerns about the exit strategy and things like that, which can make it appear that perhaps the program was designed to be an ongoing program rather than one that would result in self-sustaining activity. I think it's still a little too early to judge whether the result will be a self-sustaining ecosystem, but because it was the objective of the program, one of the things the Department of Finance needs to be measuring and providing some information on is how successful it is on that objective.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Ferguson. Our time is over.

We'll now move back to Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you.

Mr. Ferguson, my question relates to report 1 on the venture capital action plan.

I see in Exhibit 1.3 the recipient funds of the government's contribution to the action plan. I wonder where we can find the individual investments those funds made.

[Michael Ferguson]

Mr. Chair, I'll ask Mr. Domingue if he knows whether that information is in the public domain.

[Richard Domingue]

Mr. Chair, this information was not released, so it's not publicly known. I think you'd have to ask the Department of Finance or the BDC.

[Pierre Poilievre, Conservative, Carleton, ON]

Do you happen to know if they are planning to release it in the future? Is it not public because it's premature, or they just recently initiated this over the last couple of years, or is it their plan never to release the investments?

[Richard Domingue]

This is exactly the recommendation we made: that they should disclose more information about the performance of the venture capital action plan. They've agreed with our recommendation, so one would assume that eventually the investments and the performance of those investments will be made public to inform decision-makers as well as to inform potential investors in the future.

[Pierre Poilievre, Conservative, Carleton, ON]

I'd like to know more about what investments qualify for this money.

The report defines venture capital as “funding for companies that have a new idea”. The definition of “new idea” is, and has always been, vague. What constitutes a new idea? Is it a patent that is yet to bear revenue? Is it an amendment to an existing patent? Is it a new use of existing technology? What limitations are there on the investments these funds can make with the $400 million venture capital action plan money?

[Richard Domingue]

The main reason they chose that structure of funds was so they wouldn't have to select the winners. The Department of Finance, BDC, and Industry don't have to identify which investments are promising. It's up to the funds to make those investment decisions.

[Pierre Poilievre, Conservative, Carleton, ON]

Clearly there must be some criteria to determine the parameters of those decisions, because the purpose is not just to go out and make good investments. We have enormous and well-developed capital markets already in Canada. There's no market failure there. The purpose of injecting $400 million in public funds was specifically to direct it to venture capital. There must be borders around the definition of “venture capital”.

[Richard Domingue]

For each of the selected fund of funds, the government introduced some constraints in terms of the type of investment they could do or the type of research they could invest money in, such as science and tech, IT, and agriculture. These are the broad parameters that were suggested to those companies.

These investments will have to be monitored eventually to make sure they fit the constraints that were imposed on those funds of funds and that they are aligned with the government's objectives in regard to the types of broad investments these types of funds of funds are allowed to make. There were no specific guidelines to invest in company X, Y, or Z.

[Pierre Poilievre, Conservative, Carleton, ON]

Did the finance department do any analysis on how much economic activity this initiative would suppress?

If I can elaborate, they would have had to take $400 million out of the economy in order to put $400 million into the economy, unless the money was printed. Was there any analysis on what impact taking $400 million out of the economy would have?

[Richard Domingue]

Mr. Chair, as far as we know, the finance department did not do that analysis of the crowding out that the $400 million could potentially create.

I remind the member that the objective of the program was to create a self-sustaining venture capital market. The ultimate outcome of having innovation and R and D and increasing our productivity is something the finance department will have to eventually monitor. This is why we proposed a number of potential indicators in the last exhibit, two of them being patent and patent citation. These will be, in our view, better indicators of the overall outcome of those types of venture capital investments.

[The Chair, Conservative, Kevin Sorenson]

I have one quick follow-up on that before we go to Mr. Christopherson.

I think it's probably also important that we remember this was created in the midst of a massive recession, in 2011 and 2012, when we were in a global recession and there wasn't access to the capital markets and there wasn't much access to credit for some of these new start-up programs. I think that was the impetus behind making certain that some of these new programs had that opportunity. It wasn't just about how we were going to compete with capital markets; there was even a hesitancy by banks to give out capital.

I don't know if that's a question or a comment.

[Michael Ferguson]

I think, Mr. Chair, we did identify that the organizations involved assessed whether there was a need and assessed the gap. I think it is important to remember this was a $400 million disbursement on the part of the federal government that was not an expenditure. It does not hit the bottom line of the government. It's considered to be an investment.

It's important to monitor whether that investment is maintaining its value. It's difficult to do that because the underlying investments are start-up companies, innovative companies, and companies that have not yet commercialized the ideas. It's going to take a while to be able to identify whether the program is successful or not.

I think one of the reasons we wanted to bring this to the attention of Parliament is that sometimes these programs can be overlooked because it was not an expense. It was not something that hit the bottom line of the government. It's an investment. You can't determine whether that investment is going to have an appropriate return for maybe 10 years because of the types of investments underlying it.

What are the indications along the way about whether this program is doing what it's supposed to be doing and whether these companies are able to bring their innovative ideas to research and development and then to commercialization? We need to make sure it is going result in a vibrant venture capital ecosystem in Canada. It's the type of program that can be too easily have nobody paying any attention to it, and that's why we wanted to bring it to the attention of Parliament.

[The Chair, Conservative, Kevin Sorenson]

Thank you.

Mr. Christopherson is next.

[David Christopherson, NDP, Hamilton Centre, ON]

Thanks, Chair.

This is a unique opportunity for me to show colleagues that this can happen: my questions have been answered, and I decline the balance of my time.

Write it down; it happens.

[Voices]

Oh, oh!

[The Chair, Conservative, Kevin Sorenson]

Well, thank you, but there are others who still do have questions.

We welcome Mr. Baylis to the committee today for the first time. He is replacing Mr. Lefebvre.

Welcome here.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

Thank you. I'm just getting back into my chair after falling out of it.

I'm going to follow up with some more questions on the venture capital business.

I note at one point you stated the BDC did collect metrics, such as the aggregate internal rate of return. Then you go on to say:

In our opinion, publishing information about Action Plan activities and performance would help the government demonstrate to private-sector investors that commercial returns can be obtained from investing in early-stage companies.

Can I read something into that? You're not publishing the internal rate of return. Are you suggesting first of all had they published it, I could see that they do get good return on our money?

[Richard Domingue]

We're not suggesting anything here. All we're saying is that sunshine is the best antiseptic, so just publish the results for the return those types of investments are achieving, and this will inform other potential investors.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

You're clearly saying to publish the aggregate internal rate of return.

[Richard Domingue]

Yes.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

I see you also mention a lot of other metrics, such as patent capability, exits, and all of that, and those are great, but in the end I couldn't care less if they are terrible on all of those as long as I get a great rate of return, correct? Let's say we had bad patents and bad everything, but the rate of return for investing in Canadian companies was phenomenal; all the other metrics are secondary to that one metric. Is that fair to say?

[Michael Ferguson]

Mr. Chair, we should remember that our focus is that these are start-up companies at the beginning of their life that are trying to commercialize ideas and innovation.

Yes, ultimately the returns are important and are perhaps the most important thing, but those returns aren't going to happen for a number of years. The types of metrics we are suggesting are metrics that will help people understand whether in the meantime the $400 million, which is an asset of the Government of Canada, still has its asset value, or whether there are indications that some of these companies.... As we know, it's venture capital, so we know some of that—